The sense of risk on the edge as the NFP looms
- Equities are struggling as downside risks persist.
- The US non-farm payroll is the next major marker on the Fed’s taper schedule.
- The global energy crisis is weighing on risk appetite.
- WTI futures are getting closer to psychological $ 80 / bbl.
- Gold was tempered by rising expectations of a decline.
Stocks are on a slippery slope as markets cling to expectations that the Fed’s tapering should begin next month. Asian and European stocks are in the red while US futures are also down at the time of writing and are expected to reduce Tuesday’s lead. The 100-day moving averages for the S&P 500 and Dow Jones have moved from support to resistance to gains. Gold prices are suppressed around the $ 1,700 region by a US dollar index which has consolidated near year-to-date highs as the greenback is supported by rising Treasury yields.
US jobs print until green light fades
Market players around the world will use Friday’s non-farm payroll printout as confirmation of the Fed’s cut schedule. An official printout around the median forecast of 488,000 should pave the way for US policymakers to start easing their bond purchases. After all, Fed Chairman Jerome Powell has already said the inflation criteria for tapering are met; there are only further gains left in the US labor market. The better-than-expected Markit and ISM readings on the services sector for September also suggest that the US economic recovery has enough resistance to justify the Fed slowing the pace of its bond buying program.
Greater resistance for stocks
Investors must remain vigilant in the face of major risks ahead, including fears of stagflation resulting from soaring commodity prices which are fueling runaway inflation and eroding the global economic recovery. The sharper-than-expected contraction of factory orders in Germany in August only heightened fears that supply bottlenecks persist and continue to push up consumer prices. Inflationary pressures that last longer than expected could accelerate policy tightening by major central banks, with the RBNZ the latest to raise interest rates while the Bank of England is open to such a move before the end of 2021.
Uncertainties surrounding the U.S. government’s debt ceiling and President Biden’s long-term spending plans only add to headwinds for stock markets, as geopolitical tensions continue to bubble beneath the surface. Such risks leave global equities with a propensity for further declines, having exhausted many of the reasons for substantial gains.
Oil benchmarks soar
Crude oil continues to tread north, despite Saudi Aramco’s lower oil prices to its customers. OPEC + has refrained from loosening the oil taps beyond what was initially planned at its recent meeting. The additional 400,000 bpd of incoming supplies is apparently not enough to satiate a world that desperately needs oil before the winter season and “fuel switching”. However, if today’s EIA data showed an unexpected rise in US inventories, defying rumors of a 550,000 barrel pullback, it could cause recent oil gains to ease somewhat and delay the ascent. from WTI to $ 80. Overall, the uptrend in oil prices remains intact as long as natural gas prices continue to rise and global oil supplies struggle to keep pace with growing demand.
NFP could spark next major move for gold
So far this month, spot gold has been confined to a $ 23 range around $ 1,750, with markets unwilling to take a decisive step until the next U.S. jobs report. Gold prices are subdued as markets become more accustomed to the heightened outlook from the Fed’s tapering, which is boosting the dollar and US real yields. If Friday’s NFP were to beat market expectations, then we could see spot gold slump into its monthly range and test late September lows around $ 1,720 again.
While stagflation fears and demand for physical bullion may offer support for the precious metal, a more solid floor may only come around the $ 1,670 region which held up well in the first quarter of the year. This implies a greater margin of decline for gold which could be realized with further increases in Treasury and US dollar yields.